Chapter 3 Review (Life): Provisions, Options, Riders

Question 1

Straight Life

Answer 1

Basic whole life insurance with a level face amount and fixed premiums payable over the insured’s entire life. (payments made until insured’s death or age 100.)

Question 2

Whole life insurance where the insured is covered for his entire life, but premiums are paid for a limited time. As the premium payment period shortens, cash value increase faster, and fixed premiums are higher. (remain in effect until death or age 100)

Answer 2

Limited Pay Whole Life

Question 3

When one lump-sum premium payment for whole life coverage is used to create a life insurance policy, what type of policy is created?

In this kind of policy:
1. An immediate nonforfeiture value is created
2. An immediate cash value is created
3. A large part of the premium is used to set up the policy’s reserve.

Answer 3

Single Premium Whole Life

Question 4

Modified Whole Life

Answer 4

Low premiums in the early years and jumps to a higher premium in the later years and remains fixed thereafter. (Premiums just increase once.)

Question 5

Under a typical _____ Whole Life policy, the premium increases yearly for a stated number of years, then remains level. (Ex: starting out small, increasing annually over 5 years till leveling out for the rest of the policy period.)

Answer 5

Graded Whole Life

Question 6

Usually, the family head is covered with a whole life (permanent) policy, and the spouse + kids are added on with level term life riders (family term riders).

(Children policies usually convertible at age 18 or 21 without proof of insurability. Premium doesn’t change based on the number of kids.)

This form of policy can be categorized under:

Answer 6

Family Plan Policies

Question 7

Whole life and decreasing term insurance (begins date of purchase). Gives monthly income to beneficiary if death occurs during a specified period after date of purchase. If the insured dies outside the specified period, only the face value is paid to the beneficiary since the decreasing term insurance has expired.

Answer 7

Family Income Policies

Question 8

Family Maintenance Policy

Answer 8

Whole life and level term (begins date of death). Provides income to a beneficiary for a selected period of time if an insured die during that period. At the end of the income-paying period, the beneficiary also receives the entire face amount of the policy. Only the face amount will be received if the insured dies after the term policy expires.

Question 9

Multiple Protection Policies

Answer 9

Pays a benefit double or triple the face amount if death occurs during a specified period. After that period, only the face amount would be paid in the event of death. The period can be for a specified number of years, or till a certain attained age. Combines permanent insurance with level term insurance.

Question 10

Joint Life Policy

Answer 10

A policy that covers two or more people. The age of the insureds are “averaged” and a single premium is charged. It uses permanent insurance and pays a death benefit when one of the insureds dies. The survivors then have the option of purchasing an individual policy without evidence of insurability.

(They will pay a lower premium than having the same policy on each of themselves separately.)

Question 11

Joint and Survivor Policy

Answer 11

Also known as a survivorship life policy, this one covers two lives, but the benefit is paid upon the death of the last surviving insured.

(Once again, lower premium than two individual policies.)

Question 12

Interest-Sensitive Whole Life

Answer 12

a type of whole life insurance where the cash value can increase beyond the stated guarantee if economic conditions warrant. Can be called current assumption whole life insurance (CAWL). Insured gets to either increase the face amount or use the extra cash value to lower future premiums. Premiums can vary based on the insurer’s changing assumptions on its death, investment, and expense factors.

(CAWL policies are almost always a MEC (Modified Endowment Contract) due to accelerated premiums.

Question 13

Adjustable Life Policies

Answer 13

are distinguished by their flexibility that comes from combining term and whole life insurance into one plan.

Question 14

Four Adjustable Life Policy Benefits

Answer 14

1. Policyowner determines how much face amount protection is needed and how much premium they want to pay.
2. Allows you to vary your coverage as your needs change without requiring evidence of insurability.
3. No new policy needs to be issued when changes are desired.
4. Adjustable life has all the usual features of level premium cash value life insurance.

Question 15

Universal Life

Answer 15

is a variation of whole life insurance, characterized by considerable flexibility.

Question 16

Six Benefits of Universal Life

Answer 16

1. Changes may be made with relative ease by the policyowner with these flexible-premium policies.
2. Investment Gains go towards cash value.
3. Unlike whole life, universal life allows its policyowners to determine the amount and frequency of premium payments which will adjust the policy face amount.
4. Basic characteristics of a universal life policy are flexible premiums, flexible benefits, no minimum death benefit, and cash value withdrawals.
5. Cash value accumulations are subject to a minimum interest guarantee.
6. Any surrender charges of a universal policy must be disclosed.

Question 17

Allows policyowners to tie accumulation values to a stock market index, like the S&P 500. _____ policies typically contain a minimum guaranteed fixed interest rate component along with the indexed account option. These give policyholders the security of fixed universal life insurance with the growth potential of a variable policy linked to indexed returns.

Answer 17

Equity Index Universal Life Insurance (EIUL)

Question 18

Modified Endowment Contracts (MEC)

Answer 18

A policy that is overfunded, according to IRS tables, is classified as a MEC. Policies that do not meet the 7-pay test are considered MEC’s and will lose favorable tax treatment.

(This is a limitation on the total amount you can pay into your policy in the first seven years of its existence.)

Question 19

Four facts about MEC’s

Answer 19

1. If withdrawn prior to age 59 1/2, there is a 10% tax penalty.
2. Taxation only occurs when cash is distributed.
3. Funds withdrawn from a MEC are subject to last-in first-out (LIFO) tax treatment, which assumes that the investment or earnings portion of the contract’s values is withdrawn first, making these funds fully taxable as ordinary income.
4. Penalty taxes on premature distributions from a MEC normally apply to policy loans.

Question 20

Note about variable insurance products

Answer 20

Because of the transfer of investment risk from the insurer to the policyowner, variable insurance products are considered securities contracts as well as insurance contracts. A producer is required to register with the National Association of Securities Dealers to sell variable products.

Question 21

Variable Whole Life Insurance

Answer 21

Helps with inflation. Main difference from normal whole life is how its values are invested. the values are invested in the insurer’s separate accounts which house common stock, bond, money market, and other securities investment options. These are riskier but potentially higher-yielding.

Question 22

Basic Characteristics of Variable Life Policy

Answer 22

Fixed premiums, a guaranteed minimum death benefit which fluctuates over the minimum, and cash values which fluctuate and are not guaranteed.

Question 23

Combines all the characteristics of universal life and variable life. Contract owner gets to fully decide which of the available separate accounts to use.

The “_____” component refers to the ability to invest in separate accounts whose values vary because they are invested in stock and/or bond markets. The _____ component refers to the flexibility the owner has in making premium payments.

(Evidence of insurability can be required for an individual covered by a _____ _____ life policy when the death benefit is increased.)

Answer 23

Variable Universal Life

Variable

Universal

Question 24

All of these statements about Equity Indexed Life Insurance are correct, EXCEPT:

Answer 24

The premiums can be lowered or raised, based on investment performance.

Question 25

In order to sell a(n) ___ life policy, a producer is required to register with the Financial Industry Regulatory Authority (FINRA).

Answer 25

Variable

Question 26

A Universal Life policy is sometimes referred to as an unbundled Life Policy because the owner can see the interest earned, cost of insurance, and the

Answer 26

expense charges

Question 27

Which of the following types of Term Life policies most likely contains a Renewability feature?

Answer 27

10 Year Convertible Term

Question 28

What kind of life insurance policy pays a specified monthly income to a beneficiary for 30 years and then pays a lump sum benefit at the end of that 30 years?

Answer 28

Family Maintenance Policy

Question 29

The option that provides an additional death benefit for a limited amount of time at the lowest possible cost is called a(n)

Answer 29

Accidental Death and Dismemberment rider (AD&D)

Question 30

A Return of Premium life insurance policy is

Answer 30

Whole life and Increasing Term

(A return of premium life insurance policy is whole life insurance with a death benefit rider of increasing term insurance equal to the amount of premiums paid. If the insured dies within the period of term, the beneficiary will receive face amount plus the value of all paid premiums.)

Question 31

Which statement is TRUE in regards to a policy loan?

Answer 31

Past-due interest on a policy loan is added to the total debt.

(Interest on a loan which is not paid when due is added to the total debt.)

Question 32

Which of these are NOT AN EXAMPLE OF A nonforfeiture option?

Answer 32

Life Income

Question 33

How are surrender charges deducted in a life policy with a rear-end loaded provision?

Answer 33

Deducted when the policy is discontinued.

Question 34

A Cost of Living rider gives the insured

Answer 34

Additional death benefits.

Question 35

D owns a Whole Life policy that was purchased 10 years ago. If the premium payments suddenly stop and D takes no additional action, which Nonforfeiture Option will the insurer likely proceed with?

Answer 35

Extended Term